Fat recruiting packages, economic turmoil and mergers between some of the country’s largest brokerage firms have driven many financial advisors to switch firms in the past 18 months. But while hiring firms are usually happy, the firms left behind often are not, and legal trouble can follow a financial advisor out the door. FAs need to be prepared in case they get hit with lawsuits seeking to prevent them from soliciting their clients or seeking damages for alleged breach of duties. Below are some important legal questions to consider before making a move.
1. Is your current and prospective firm a signatory to the Protocol for Broker Recruiting? The Protocol is an agreement between over 400 brokerage firms (including UBS, Wells Fargo Advisors, Bank of America and Morgan Stanley Smith Barney) and individual investment advisory firms (RIAs) that sets out that if an advisor follows certain procedures when switching from one protocol firm to another protocol firm, there will be no litigation.
For example, the advisor is allowed to take certain information, such as client names, addresses, phone numbers, email addresses and account titles, with him to his new firm, as long as he leaves this same information with his old firm when he resigns. He can then solicit his old clients from the new firm using this same client information.
Despite these Protocol terms, some signatory firms have sued advisors to prevent them from using such client information to solicit their former clients. Increasingly, in such cases, courts have decided in favor of advisors. That said, financial advisors should determine whether the firm they are considering joining is a member of the Protocol and, if so, make sure they understand their rights and obligations under it. Some firms have lately been tacking on exceptions to their membership in the protocol agreement.
2. Do you have any financial obligations to your current firm? Brokerage firms that merged with others over the past two years have offered lucrative retention packages to financial advisors to encourage them to stay. These retention packages often require financial advisors to pay back money if the advisor leaves prior to the end of a fixed period of time, in some cases many years.
In other cases, financial advisors have the option to receive the retention award in yearly lump sum payments, and if an advisor leaves before the yearly anniversary, they forfeit the entire year’s payment (as well as any future payments). Consider this hypothetical—an advisor has a retention award with an anniversary date on March 31, 2010. If the advisor leaves on March 30, 2010 (as opposed to April 1), he or she may have to pay back the entire award received that year. Financial advisors should review the details of their retention packages to determine their financial exposure under the terms of their award.
3. Do you have a non-compete or non-solicit agreement with your current firm? A non-compete agreement can restrict a financial advisor’s ability to switch firms by prohibiting an advisor from working for a competing firm within a proscribed location and period of time. How these non-compete agreements are written and enforced varies from state to state. A non-solicitation agreement may restrict a financial advisor’s ability to solicit his or her former clients.
For example, a retention award may contain a non-solicitation clause that restricts an advisor’s ability to solicit clients unless the financial advisor pays back money still owed on a retention award. If an advisor has such a clause in a retention agreement, he must ensure he has sufficient funds to pay back the money owed or risk facing an enforcement suit from his former employer.
4. What are your duties to your current firm, especially if you are a branch manager, when you leave the firm?
Financial advisors may continue to owe legal duties to their current firm even if they are planning to leave. Financial advisors must be careful to continue to do their job to the best of their ability while still employed with their current firm. Discussing your intentions to leave with your fellow coworkers, recruiting clients prior to your departure, or providing information about your current firm to your new firm, are all actions which may be a breach your fiduciary duties to the firm.
This is the type of conduct Wachovia Securities accused four advisors in South Carolina of engaging in when the advisors left Wachovia for Stifel Nicolaus. In December 2009, a FINRA arbitration panel held that the advisors were not liable, but they endured a lengthy legal battle in federal court and FINRA arbitration. Awareness of the legal “rules of the road” when switching firms can help prevent advisors from facing years of costly and time-consuming litigation.
5. Are you using e-mail to communicate with your prospective firm?
Financial advisors should be careful when communicating with their prospective employer. If an advisor is sued after they leave, they may be required to turn over e-mails sent from their personal e-mail address, cell phone records, any notes taken during meetings with their prospective employer or calendars documenting meetings with prospective employers. These documents may be used to support a claim against the advisor.
The facts specific to a financial advisor’s situation can greatly impact his legal risk. If you are thinking about making a career move, consider seeking legal advice concerning the associated risks first. The information in this article is not intended to constitute legal advice and should not be relied upon in lieu of consultation with an attorney.
Caitlin M. Piccarello is an attorney with Saul Ewing LLP based in Philadelphia, Pennsylvania. Ms. Piccarello has represented financial advisors throughout the country, advising them on their obligations under the Protocol and defending them against suits brought by their former employers. Ms. Piccarello can be reached at (215) 972-7153 or firstname.lastname@example.org.